Brazil, one of the quickest and most aggressive emerging countries to hike interest rates, is likely to begin decreasing them as Latin America reaps the benefits of fighting inflation faster than the G7.
Most economists believe the Banco Central do Brasil will drop its benchmark rate, which is currently 13.75 percent, by at least a quarter point, if not more.
Chile became the first major Latin American country to lower interest rates after the epidemic, lowering borrowing costs by a full percentage point to 10.25 percent last Friday.
“Even if the fight against inflation is not over yet, Latin American central banks can rejoice. In this cycle, they have stood out for their discipline, autonomy, commitment, and clear communication,” said Ernesto Revilla, chief economist for Latin America at Citi in New York.
“Inflation-targeted monetary policy in Chile, Brazil, Mexico, Peru, and Colombia is teaching the rest of the world a lesson,” Revilla added.
Brazil’s rate-setters raised the Selic rate from an all-time low of 2% in a series of hawkish actions that began in March 2021, counteracting the inflationary impacts of lavish government spending and rate cuts unleashed in reaction to the COVID-19 outbreak.
The Federal Reserve of the United States did not begin hiking interest rates until March 2022, a year later. The European Central Bank moved even more slowly, tightening policy for the first time in July of last year.
The effects of Brazil’s early rate hike on combating inflation are clearly obvious.
Latin America’s largest economy’s consumer price rise dropped to 3.2 percent in the year to June, falling short of this year’s stated objective. Chile’s headline annual inflation rate is 7.6 percent, which is less than half of the 14.1 percent peak reached in August of last year.
Although Brazil’s central bank has received international praise for keeping inflation under control, its hawkishness has been widely criticized at home.
Mexico, the second-largest economy in Latin America, faces a different dilemma.
Because of its direct ties to the thriving US economy, headline inflation remained high in the year to June, at 5.1%. “In Mexico, inflation is still quite sticky, particularly in the services sector,” said Irigoyen.
The Peronist government’s penchant for creating money to support public spending, along with significantly skewed official exchange rates, has resulted in annual inflation of more than 110%. Interest rates are currently around 155% on an annual basis.
